Energy Subsidy Reform: Lessons and Implications Benedict Clements Fiscal Affairs Department International Monetary Fund November 2014 This presentation represents the views of the authors and should not be attributed to the IMF, its Executive Board, or its management.
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Energy subsidies are approximately $2 trillion worldwide Pretax $492 billion (0.7% GDP, 2.1% revenues) Posttax $2 trillion (2.9% GDP, 8.7% revenues) Coal, 7 Electricity, 150 Petroleum products, 220 Coal, 709 Petroleum products, 728 Natural gas, 116 Electricity, 179 Natural gas, 376 Sources: IEA World Energy Outlook 2012; OECD; World Bank; and IMF staff estimates. 3
How to do subsidy reform Identify ingredients for successful subsidy reform from 22 country case studies 14 on fuel, 7 on electricity, and 1 on coal broad regional coverage (7 from SSA, 2 from E.D. Asia, 3 from MENA, 4 from LAC, and 3 from CEE-CIS) 28 reform episodes (12 successful, 11 partially successful, and 5 unsuccessful) Supplemented by lessons from FAD technical assistance (19 reports in the past 5 years) on energy subsidies and work by other institutions 4
Six key reform ingredients (i) A comprehensive reform plan clear long-term objectives assessment of the impact of reforms consultation with stakeholders (ii) A far-reaching communications strategy inform the public of the size of subsidies and benefits of reform strengthen transparency in reporting subsidies 5
Six key reform ingredients (iii) Appropriately phased and sequenced price increases permit households and enterprises time to adjust and governments to build social safety nets sequence increases differently across products (iv) Improvements in the efficiency of state-owned enterprises (SOEs) to reduce their fiscal burden improve information on their costs, set performance targets and incentives, and introduce competition where appropriate improve collection of energy bills 6
Six key reform ingredients (v) Targeted mitigating measures to protect the poor targeted cash transfers are preferred when cash transfers are not feasible, other programs can be expanded as administrative capacity is developed SOE restructuring may also require targeted measures (e.g., job training) (vi) Depoliticize price setting implement automatic price mechanism (with price smoothing) establish an autonomous body to oversee price setting 7
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Additional Background Material 9
Consequences of energy subsidies go well beyond fiscal costs Aggravate budget deficits, not only through direct spending but also through forgone revenues if energy taxes are set below efficient levels Depress growth make investments in the energy sector unattractive crowd-out critical growth-enhancing public spending over-allocate resources to energy intensive sectors By increasing energy consumption, exert pressure on the balance of payments of net energy importing countries Intensify climate change by encouraging energy consumption Widen the gap between the rich and poor 10
Measuring consumer subsidies Pretax subsidies exist when energy consumers pay a price below the supply cost of energy, including transportation and distribution costs Tax subsidies arise if energy taxes are too low: energy should be taxed the same way as any other consumer product, plus additional taxes to account for the adverse effects of energy consumption not captured in the pretax price that is, externalities) Posttax subsidies equal pre-tax + tax subsidies 11
Data sources Pre-tax subsidies IEA World Energy Outlook 2012 for 39 countries for electricity, natural gas, and coal OECD: producer subsidies for coal for 16 countries; for book estimates, now include producer subsidies for natural gas for 9 countries, and for petroleum products for 12 countries World Bank and IMF staff estimates for 36 countries in electricity IMF staff estimates for petroleum products (gasoline, diesel, kerosene) for 176 countries Post-tax subsidies IMF staff estimates based on pretax subsidies and adjustments for revenue considerations and externalities 12
Petroleum and electricity dominate pretax subsidies, while coal subsidies are negligible Pretax $492 billion (0.7% GDP, 2.1% revenues) Coal, 7 Electricity, 150 Petroleum products, 220 Natural gas, 116 Sources: IEA World Energy Outlook 2012; OECD; World Bank; and IMF staff estimates. 13
Nearly half of pretax subsidies are from MENA region Pretax $492 billion (0.7% GDP, 2.1% revenues) S.S. Africa, 19 Advanced 25 CEE-CIS, 72 MENA, 237 E.D. Asia, 102 LAC, 36 Sources: IEA World Energy Outlook 2012; OECD; World Bank; and IMF staff estimates. 14
Advanced economies account for about 40 percent of tax subsidies Pretax $492 billion (0.7% GDP, 2.1% revenues) Posttax $2.0 trillion (2.9% GDP, 8.7% revenues) S.S. Africa, 19 Advanced 25 S.S. Africa, 42 CEE-CIS, 72 LAC, 109 MENA, 382 Advanced, 642 MENA, 237 E.D. Asia, 102 LAC, 36 E.D. Asia, 575 CEE-CIS, 241 Sources: IEA World Energy Outlook 2012; OECD; World Bank; and IMF staff estimates. 15
Posttax subsidies as a share of GDP and government revenues are much higher in MENA 15 35 30 Percent of GDP 25 Percent of revenues 15 Percent of GDP 10 5 Percent of Government Revenues 20 15 Percent of GDP 10 5 10 5 0 0 MENA CEE-CIS E.D. Asia S.S. 0 Africa LAC Advanced MENA CEE-CIS E.D. Asia S.S. Africa LAC Advanced MENA CEE-CIS E.D. Asia S.S. Africa LAC Advanced Sources: IEA World Energy Outlook 2012; OECD; World Bank; and IMF staff estimates. 16
Under-pricing for externalities accounts for a large share of posttax subsidies across all regions 40 35 30 VAT (% revenues) Externality (% revenues) 25 20 Pretax (% revenues) 15 10 5 0 MENA E.D. Asia CEE-CIS S.S. Africa LAC Advanced Sources: IEA World Energy Outlook 2012; OECD; World Bank; and IMF staff estimates. 17
How energy subsidies increase inequality Energy subsidies benefit the wealthiest, who consume much more energy than the poor The richest 20% get more than 40% of the benefits from energy subsidies (6 times the share of the bottom 20%) By product Distribution of Petroleum Product Subsidies by Income Group (In percent of total petroleum product subsidies) Top quintile 42.8 Source: Arze del Granado, Coady, and Gillingham (2012) 7.2 22.5 11.4 Bottom quintile 16.2 Second quintile Third quintile Fourth quintile 18
Distribution of petroleum product subsidies by income groups Bottom quintile Gasoline Second quintile Third quintile Kerosene Fourth quintile Top quintile LPG Diesel Back Source: Arze del Granado, Coady, and Gillingham (2012)